The federal government has released details of its compensation scheme of last resort (CSLR) as part of the banking royal commission recommendations for victims of dodgy financial institutions, but it has come under attack from all sides.
Consumer groups have accused the scheme of scrimping on the amount victims should receive as part of the compensation scheme while finance groups have said that it could signal the end of financial advice.
The federal government had previously committed to a compensation cap of $542,500, which was in line with current Australian Financial Complaints Authority (AFCA) compensation caps, but the proposed new legislation caps compensation at just $150,000 and excludes significant parts of the finance sector.
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The government had also previously committed to a financial accountability regime that included fines of over $1 million to finance executives whose companies broke the law under their watch, but the proposed legislation has done away with those components and also weakened the clawback bonus requirements.
Nine consumer groups have responded angrily to the changes, co-signing a submission calling for the government to reverse its much lower cap on restitution for those who have suffered from poor corporate behaviour.
CHOICE, one of the nine groups involved in the submission says the proposed legislation has dealt a crushing blow to those awaiting compensation.
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“When the government released its response to the banking royal commission, it gave victims of financial scandals hope that they would finally be compensated. For many victims, those hopes have now been dashed,” CHOICE chief executive Alan Kirkland said.
“The government committed to a scheme that could pay over $540,000 in compensation, as recommended by the royal commission, covering a broad range of financial scandals.
“The proposals now released by the government will disappoint victims by capping compensation at $150,000 and failing to cover compensation from financial scandals in areas like managed investment schemes and funeral insurance. This will see many people go uncompensated.”
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The submission – co-signed by CHOICE, the Consumer Action Law Centre, Financial Counselling Australia, the Financial Rights Legal Centre, Super Consumers Australia, the WA and SA Consumer Credit Legal Services, the Indigenous Consumer Assistance Network and the Victorian Aboriginal Legal Service – said this legislation was too important to fail.
“It is essential that the government gets the design of the CSLR right in the first instance to ensure that the Australian community is protected and trust is restored to the financial sector,” the submission stated.
“This is the opportunity to set a strong and fair foundation that works for the Australian community.”
The proposed legislation has also fallen foul of financial advisers, with some groups claiming that it could be the ‘last straw’ for the industry.
Eight financial advice industry associations – including the SMSF Association, the Financial Planning Association and the Association of Financial Advisers – have submitted their combined opposition to the proposal, suggesting that the scheme will become a go-to option rather than being used as a last resort.
“All eight associations support a compensation scheme that is truly ‘last resort’, however, the current structure includes the Australian Financial Complaints Authority’s (AFCA) outstanding expenses, in addition to failing to address the causes of unpaid consumer compensation,” the submission stated.
“The associations share a concern that the compensation scheme may not be used purely as a last resort – this is a major and unwarranted departure from the royal commission’s intent.
“The federal government made a commitment to reducing red tape to cut the cost of doing business. The proposed compensation scheme will add significant cost and complexity, which is at odds with this commitment.”
The statement from the financial adviser associations also says the costs of meeting the regulatory requirements could force more people from the industry.
“Impacts of COVID-19 and Australia’s ageing population mean the nation’s advice needs are growing, yet escalating regulatory costs have already caused many advisers to leave the industry,” the statement explained.
“The total number of financial advisers has fallen below 20,000 and will not be enough to meet increasing demand. We anticipate the proposed compensation scheme will further reduce adviser numbers.”
Speaking to CHOICE, victims of the collapsed Sterling First investment scam in West Australia have told the consumer advocate that they feel let down by the government.
Annette Taylor, a 69-year-old from Western Australia lost her entire nest egg of $220,000 and now lives on the Age Pension.
“It’s just shocking, and the government has done absolutely stuff-all to help us. It has destroyed me. I just want the money back and to get on with my life,” Ms Taylor told CHOICE.
“Victims of financial scandals and banking misconduct deserve better,” Mr Kirkland said. “To present legislation that is watered down, ineffective and will exclude thousands of victims is a devastating blow.
“We know from past experience that times of economic crisis provide fertile ground for scams and misconduct,” he said.
“We need strong executive accountability and a compensation scheme for victims now, and we need both measures to be broad-based and effective.”
Do you think victims of dodgy financial institutions deserve better access to compensation? Should there be bigger penalties for financial institutions caught doing the wrong thing? Why not share your thoughts in the comments section below?
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